Negative outlook? Bond rating gets closer look (Part II)

Editor's note: This is the

second article in a two-part series exploring the "negative outlook" given to Fairfield by a credit

rating agency.

When Moody's Investors Service gave a "negative outlook" to roughly $200 million of Fairfield's debt, it offered two reasons.

The first reason was that the town's cash reserves are low compared with other municipalities awarded the top triple-A credit rating (subject of an article in last Friday's Fairfield Citizen and online at fairfieldcitizenonline.com).

The second reason was Fairfield's "inability to eliminate a long-standing internal service fund deficit."

Moody's threatened to downgrade the town's triple-A credit rating if it fails to substantially reduce -- or eliminate -- the deficit in the fund. That could bring higher interest rates when Fairfield seeks to finance future projects through issuing bonds.

Should Moody's assessment be cause for concern?

"It's a comment we should be cognizant of, but a comment we've been addressing," said Board of Finance Chairman Tom Flynn. "It's not something that's going to be addressed overnight."

What is the Internal Service Fund?

In short, the internal service fund is the town's "insurance/risk" fund, according to Paul Hiller, Fairfield's chief fiscal officer.

Among other things, the fund covers health insurance for town employees, workman's compensation claims, and all the liability and property claims facing the town. It doesn't, however, cover retired town employee benefits, which are now covered by the Other Post Employment Benefit (OPEB) trusts, established in 2008 and 2009, Hiller said.

It's a busy fund, with more than $35 million in cash flowing through it over the course of a year, according to Hiller. And it's currently running at a deficit of roughly $4.5 million.

Four weeks into the current fiscal year, Hiller estimates the fund has roughly $8.6 million in cash, $8.7 million in one-year liabilities and $4.4 million in long-term liabilities.

Every year, the town puts some money into the fund, while the town employees put a portion of their salaries into it based on their union contracts. The risk is that more claims will be made during a particular year than town officials had planned for, driving the fund into a deficit.

The deficit hit a high point at the end of the last fiscal year, when it reached $4.9 million, Hiller said. The year before that, the deficit was just over $3 million. But the apparent reduction in the deficit over the past year is seen by Hiller as positive.

"I feel far more comfortable today on the budgetary funding for this fund than I would have, say, a year ago today," he said. "It's getting better. There's still a long way to go, but it's getting better."

How did the deficit

get so deep?

At the end of the 2001-02 fiscal year, the internal service fund had a surplus of $4.6 million, Hiller said. So what happened?

Hiller cites a number of variables. The first, he says, has been rising health-care costs across the nation. Another, he says, is that there was a spike in workman's compensation claims in recent years, especially in the 2008-09 fiscal year.

A third factor involves the creation of OPEB in 2008 and 2009, which pulled $1.9 million in cash out of the fund, but which also reduced the liabilities.

The fourth factor is the broader state of town finances in recent years. "Back in 2002, our debt service budget was less than half what it is today," Hiller said.

Then came a slew of building projects that were financed by issuing bonds.

"You can't have everything," Hiller said. "Part of it was done with the knowledge that if we'd have to rapidly increase the debt picture, we couldn't continue to fund this as aggressively as we had been."

So what's being done?

Despite the deficit, Hiller is quick to point out that the fund has nearly $9 million in cash at present and that it's well prepared to handle any liability risk.

But the town's goal is to have the fund in surplus, he added, which has recently become a priority of the Board of Finance.

"For this current fiscal year, we added funding to that account over and above what the administration requested to," Flynn said.

The board tacked on roughly $250,000 to what the Flatto administration originally requested, Flynn said, because outside experts -- the town's actuaries and contracted insurance consultants -- told the board the earlier contribution numbers weren't enough.

"In previous years, we've been presented with the administration's view," Flynn said. "But because we were concerned over any type of deficit developing in that account, we asked the outside experts to come before our board."

First Selectman Kenneth Flatto said he had originally proposed putting "a bit less" money into the health insurance and workman's compensation accounts. The consultants at AON have predicted that health insurance this year will go up 10 percent, Flatto said.

"We're hoping it's not going to increase as much," Flatto said. He also hopes to negotiate "give-backs" on health insurance benefits to save money.

Not too concerned ...

Two companies who weren't fazed by Moody's negative outlook for Fairfield are Fidelity and J.P. Morgan, the winners of a recent bond sale held by the town. The two electronic auctions were for the rights to $25 million and $18.1 million in fresh bonding, and the auctions were very competitive.

As a result, Fairfield locked in historically low interest rates, which Hiller said he was "ecstatic" about. (Fidelity secured a 3.22 percent interest rate for the $25 million in long-term debt; J.P. Morgan a 0.33 percent rate for the $18.1 million in one-year notes.)

The results were helped by the fact that Moody's, Standard & Poor's and Fitch Ratings all issued Fairifeld a triple-A credit rating the week before the sale.

"That is not an insignificant accomplishment in these challenging economic times," Flynn said. "It's something that not just the town government, but the citizens should be proud of."

The market, he added, "isn't too concerned about [the negative outlook]. They priced our bonds so well."